[7] "Where there are insufficient profits to fully pay the Distribution entitlement, York may declare and pay a lesser Distribution out of available profits. Any shortfall from the Distribution entitlement shall carry forward to a successive period until declared and paid."
[8] "In the event York is wound up or undertakes a reduction of capital, the holders of the Securities have priority to other classes of shares for payment of dividends. Such entitlement is contingent upon York declaring the dividends beforehand. Such dividends would include both the cumulative preferential dividend entitlement and participating dividend entitlement."
[9] "Once duly declared as a final dividend, the rights to a dividend would constitute a debt of York, and investors would have ordinary debt recovery options available to them for such a debt."
27 The matter of redemption of CPRPS shares offered by the prospectus is dealt with as follows (again with numbers added):
[10] "The Securities offered under this Prospectus are redeemable at the Redemption Date.
[11] The Redemption Date depends on the class of share and the specific investment period adherent to each share class, after the date of issue of the shares or otherwise agreed in writing between the Investor and York.
[12] Prior to the Redemption Date, York will send the Investor a notice advising that the investment is about to mature.
[13] At least two (2) Business Days prior to the Redemption Date, the Investor may request in writing that the investment:
· be redeemed upon the expiration of the current investment terms; or
· be reinvested for the same investment term as the expiring investment; or
· be reinvested for a different investment term to the expiring investment.
[14] The Investor may also request a partial redemption of the investment provided the minimum investment balance of $5,000 is maintained. Additional investments may also be made, in multiples of $1,000.
[15] Where York is unable to comply with Section 254K of the Corporations Act 2001 in regard to the redemption of Securities, due to there being insufficient profits or proceeds from Security issues issued for the purposes of enabling redemption, York may, as an alternative to redemption, undertake a selective buy-back of the shares.
[16] Under Section 257A of the Corporations Act 2001, a company may buy back its own shares if the buy-back does not materially prejudice its ability to pay its creditors and the company follows the procedures set out in Division 2 Chapter 2J of the Corporations Act 2001.
[17] Under Section 256(C) of the Corporations Act 2001 a selective share buy-back may occur if it is approved by either:
· a special resolution passed at a general meeting of York, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced, or by their associates; or
· a resolution is approved by all the ordinary investors of York.
[18] York Managed Funds Pty Ltd holds one hundred percent of the issued ordinary shares in York.
[19] It is, therefore, the intention that all Securities will be redeemed or acquired by York under a share buy-back mechanism, at the subscription amount of $1.00 per Security or the paid-up capital on the Security, thus returning the full capital amount."
The dividend provisions
28 As I have said, the articles place the matter of release of dividends in the hands of the directors who must, however, recognise special rights to dividends carried by any shares. The CPRPS shares are clearly shares with special rights to dividend. The dividend on those shares is a "preferential dividend". It follows that no dividend may be paid on issued shares other than CPRPS shares (that is on "H" class shares or ordinary shares) unless the stipulated dividend in respect of the CPRPS shares has been paid.
29 If, at a time for payment of a dividend on CPRPS shares, the profits available for dividend are insufficient to permit the payment of the stipulated dividend in full, the whole of the available profits must be applied towards that dividend. This is the effect of the requirement that payment be made at a fixed rate specified on the share certificate (prospectus item [1]). The deficiency will then be carried forward to the next payment date so that, on the subsequent occasion, the dividend referable to that occasion plus the deficiency carried forward enjoy the priority call on profit available for dividend. This is the effect of the dividend being a cumulative dividend. The dividend right on the subsequent occasion is a priority right to the aggregated amount: see Re Wakley; Wakley v Vachell [1920] 2 Ch 205 at 225-6.
30 Where dividends are expressed to be cumulative, it is not, strictly speaking, correct to speak of "default" or "arrears" if there are no profits available for dividend or those available are sufficient to cover part only of the dividend. The shareholder's right is to have the deficiency carried forward in the way described so that the stated priority is enjoyed as to future profits: Godfrey Phillips Ltd v Investment Trust Corporation Ltd [1953] 1 All ER 7. Carrying forward is the prescribed method of dealing with the right to the extent that it is not satisfied by payment.
31 All this is expressly recognised, in the present case, by item [6] in the prospectus. Dealing with the situation where a preference dividend is not "declared", that provision says that the "undeclared entitlements" are "carried forward into the next succeeding period until declared". This not only states explicitly what is implied by the description "cumulative" but also makes it clear that the determinant of whether the "entitlement" for a particular period is satisfied is whether a dividend in fulfilment of the entitlement is "declared" (see also prospectus item [3]). That, read in conjunction with the constitution, shows that the extent of satisfaction depends on "declaration" of dividends by the directors. The same message emerges from item [7] of the prospectus where the words "declared and paid" are used.
32 Item [9] of the prospectus states that no debt for a dividend exists until a final dividend is declared. This is a reflection of the effect of s 254V(2) of the Corporations Act.
The redemption provisions
33 The constitution provides in article 24.5.14 that a CPRPS share "shall be redeemed on or before the Redemption Date by the payment to the holders [sic] thereof [sic] the sum paid up on such share, and all arrears of dividends". The words "by the payment" show that it is the payment that effects the redemption and that the act of payment by the company marks the point at which redemption occurs. Since redemption is the event that, by operation of the second sentence of s 254J(1), causes the share to be cancelled, it must follow that payment by the company results instantaneously in the redemption and simultaneous cancellation of the share. The process is not one under which redemption gives rise to an obligation to pay, so that the rights of the shareholder are "transmuted by the redemption process into the entitlement to the price": MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) [1999] HCA 51; (1999) 198 CLR 494 at [34].
34 Having regard to s 254J, it is lawful to redeem CPRPS shares on the terms stated in article 24.5.14, they being terms of issue. But under s 254K, York "may only redeem" the shares "out of profits or the proceeds of a new issue of shares made for the purpose of the redemption". It follows that if neither "profits" nor "proceeds" of the kind mentioned are, at the particular time, available, it is not lawful for the company to redeem the shares and they must not be redeemed; and this is so despite the terms of issue.
35 This is expressly recognised in the prospectus and thereby accommodated by the terms of issue. Prospectus item [15] raises the possibility that York will be "unable to comply with Section 245K of the Corporations Act 2001 in regard to the redemption of Securities". The provision goes on to describe "an alternative to redemption" that York "may" adopt. The reference to a possible alternative carries implicit recognition that redemption is not required unless it can be effected lawfully.
36 It is also made clear by prospectus item [15] that the stated alternative (selective buy-back of the relevant CPRPS shares under Division 2 of Part 2J.1) is, from York's perspective, optional. This comes from the word "may", coupled with prospectus item [17] outlining the hurdles that must be negotiated to effect such a buy-back. The ability to effect a selective buy-back is thus presented as itself potentially problematic. Furthermore, prospectus item [19] shows that redemption or buy-back so as to return "the full capital amount" is no more than an "intention".
37 The terms of issue thus provide that there will be neither redemption nor buy-back unless all conditions making the particular action lawful are satisfied.
Observations on the availability of profits
38 Both the constitution and the prospectus intend to accommodate, and do accommodate, the rule in s 254T of the Corporations Act that a dividend "may only be paid out of profits of the company".
39 As I have said, the description of the dividend as a "cumulative preferential dividend" recognises the possibility that sufficient profits may not be available when the time fixed for payment of a dividend arrives. The concept of availability of profits for dividend - or, I suppose, the question of what it is that s 254T requires - should be briefly examined.
40 It is not necessary, in the present context, to consider what may and what may not properly be regarded as components of "profits". The emphasis is, rather, on process: at what point and in what manner do profits come into existence, as it were, so as to be a proper source of dividends?
41 It is, in my opinion, clear that profits are available, in the relevant sense, only if disclosed by financial statements formally drawn up and adopted. The need for profits to be disclosed in that way was referred to by Mahoney JA in Marra Developments Ltd v B W Rofe Pty Ltd [1977] 2 NSWLR 616 at 642-3:
"The term 'profits' denotes a balance or a comparison between two statements of assets, and, where used in connection with companies, presupposes the existence of a process of accounts in which the assets of the company have been put into accounts or categorized in particular ways. To speak of a payment out of profits is, therefore, to speak of a payment out of a balance arising in the context of such a form of accounting. In this sense, payment means, in practical terms, the debiting or crediting of accounts … In relation to dividends, the principle that they shall be payable only out of available profits refers to the debiting of the amount of the dividend against an account showing a balance of available profits. Under the general law, the rule requires, at least normally, that when a dividend is declared and a right created in the shareholders against the company for payment of it, the appropriate profits account shall be debited with the amount of the dividend. Once this is done, then the requirements of the rule are satisfied. When the dividend is satisfied it is not required that there be another debiting of the profits. What, at least normally, then takes place, is the use of the profits which were, when the dividend was declared, set aside by that debit to meet the liability which the declaration created."
42 The constitution of York contains provisions about ascertaining profits and the distributable quantum. Article 18.4 says that the directors, "may, before declaring any dividend, set aside out of the profits of the Company such sums as they think proper as reserves, to be applied, at the discretion of the Directors, for any purpose for which the profits of the Company may properly be applied". Article 19.1 permits the capitalisation of profits. Under both these provisions, profits that might otherwise have been used to pay dividends may be applied in other ways. Only such residue of profits as remains after any such applications is properly available for dividend.
43 Circumstances may be such that it is either necessary or prudent to carry profits to a reserve rather than treating them as available for dividends. An unrealised capital gain arising by reason of revaluation and disclosed in the accounts may be the source of a dividend. As the High Court observed in Commissioner of Taxation v Sun Alliance Investments Pty Ltd [2005] HCA 70; (2005) 80 ALJR 202 at [49], "the concept of profits in the context of company law is sufficiently broad to encompass unrealised capital profits". But good practice or adherence to accounting standards may not only impose constraints upon revaluation (so that, for example, classes of assets rather than individual assets are considered) but also require that the unrealised surplus be carried to a revaluation reserve.
44 At an even earlier stage, directors will be called upon to exercise judgment and prudence in relation to contingencies. To the extent that debts owing to the company may be judged unlikely to be recovered, it will be appropriate to recognise a provision for doubtful debts which reflects in the determination of profits as such.
45 These and similar matters are of significance because they show not only that principles of prudence are to be applied in determining profits but also that profits, once ascertained, may be in part devoted to other purposes before being considered a proper source of dividends. This is sometimes said to represent the difference between distributable profits and profits available for dividend - the latter being, in the words of Maugham J in Long Acre Press Ltd v Odhams Press Ltd [1930] 2 Ch 196 at 202, those profits "available for dividend after making any reserve or other similar application which the directors, in good faith, acting on behalf of the company, think it is their duty to make in the interests of the company".
The relevant concept of "creditor"
46 Against this background, it is possible to approach the question whether a holder of CPRPS shares is a "creditor" for the purposes of Part 5.3A of the Corporations Act.
47 It was accepted by the parties that "creditor" status for these purposes is to be determined in the manner indicated by the Court of Appeal of Victoria in Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24. It was there held that, unless a particular provision otherwise indicates, the "creditors" of a company for Pt 5.3A purposes are "those who would have been creditors had the company gone into liquidation", thus importing into Part 5.3A the criteria laid down by s 553 for participation by creditors in a winding up.
48 Since the enactment of the Corporate Law Review Act 1998 (Cth), all claims against the company (present or future, certain or contingent, ascertained or sounding only in damages) have been provable in a winding up pursuant to s 553. This includes claims sounding only in damages which were previously excluded through the application of s 82(2) of the Bankruptcy Act 1966 (Cth).
49 Of particular relevance here is the inclusion of claims that are "future" or "contingent". A future debt or claim is probably one which will become due and owing at a future time, if a present state of affairs continues until then, such as rent for a future period under an existing lease which will become due and owing unless the lease is terminated in the meantime. A contingent claim, by contrast, is one sourced in an existing obligation out of which a payment liability to pay will arise upon a future event, whether the event is one that must happen or only one that may happen: Edwards v Attorney-General [2004] NSWCA 272; (2004) 60 NSWLR 667 at [59].
50 Central to both, however, are obligations or liabilities the performance, discharge or vindication of which consists of the payment of money.
Applying the concept to this case
51 It was submitted by Mr Kunc SC on behalf of the defendants that they and all other holders of CPRPS shares have, as against York and by virtue solely of their CPRPS shareholdings, claims that would be cognisable pursuant to s 553 in a winding up of York. Mr Kunc approached the matter in two ways: first, by reference to what he called the "contingency analysis"; and, second, according to the "non-contingency analysis".
52 The "contingency analysis" proceeds on the basis that, if and when York has funds making it lawful to pay the stipulated dividends to CPRPS shareholders and to effect redemption of their shares consistently with s 254T and s 254K respectively, York will be obliged to make payments to them accordingly. The "non-contingency analysis" is to the effect that, having regard to the terms on which the CPRPS shares were issued, the holders of those shares have an accruing right to the stipulated dividends and the redemption sum. There is, it is said in the latter connection, an implied term that York will do all that is necessary on its part to enable the CPRPS shareholders to have the benefit of their contract, relevantly to ensure that it has funds available from the requisite sources. Reference was made to Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd (1979) 144 CLR 596 at 607.
53 A preliminary comment is that the "contingency analysis" might be employed to reach the conclusion that every shareholder of every company is a creditor of the company. If and when the company has funds making it lawful to pay a dividend and the processes necessary to cause a dividend to be payable have been undertaken, the company will be obliged to make payments to the shareholders accordingly. I am not at all convinced that, on that footing, every shareholder is, from the very first moment, a future or contingent creditor of some kind.
54 In support of the contention that there is an implied term of the kind postulated by the "non-contingency analysis", Mr Kunc referred to the decision of the High Court of Singapore (G P Selvam J) in UOB Venture Investments Ltd v Tong Garden Holdings Pte Ltd [2001] 1 SLR 362. That case concerned a contract between the plaintiff investor, the Tong Garden company, three directors of Tong Garden and a shareholder in Tong Garden. The plaintiff agreed to invest a stated sum by subscribing for redeemable preference shares in the capital of Tong Garden. The contract provided for the redemption of the shares by Tong Garden at the plaintiff's option in specified events. It positively required Tong Garden to redeem the shares upon exercise of that option by the plaintiff. The court held that there was an implied term generally of the kind for which Mr Kunc contends in this case. I quote from paragraph [20] of the judgment:
"The plaintiffs' claims in contract. The contract provides that if the company defendants fail to secure a listing within the stipulated time, the plaintiffs may call for a redemption. Under the contract the obligation to redeem on notice is absolute. When the first defendants contracted for that obligation they were fully aware of s 70(3) of the Companies Act [analogous with Australia's s 254K]. They must therefore be presumed to have contracted on the basis of s 70(3) of the Companies Act. In the context of s 70(3) of the Companies Act, the company defendants' contractual obligation to redeem implies that they must bustle about to bring in the funds. They must expend all their energy in their veins to find the funds in the manner permitted by s 70(3) of the Companies Act. The defendants are not allowed to call in aid their own indolence and inaction. Nor can they seek shelter under s 70(3) of the Companies Act. Their contractual obligation implies that they will see to it that their subsidiary and related entities and persons will put them in sufficient profits or take up new shares to produce sufficient funds. Finding the funds by those two options, I repeat, is an absolute obligation. If they fail there are three remedies to the preference shareholder: equity can compel them to do so by an order for specific performance; common law can award damages; and company law can order them to be wound up. If damages are awarded they must come from profits or fresh share issue. In the event of liquidation the shareholders' claim would rank after the claims of creditors."
55 Reference was also made to the decision of the New Zealand Court of Appeal in Mutual Life and Citizens Assurance Co Ltd v Mosgiel Ltd [1994] 1 NZLR 146. It was there held that there was a contractual obligation to make the payment required by the terms of issue on the specified redemption date. The available remedies, however, "must not be inconsistent with the legislative constraints on the sources of redemption funds". This was a reference to the then New Zealand equivalent of s 245K.
56 The notion that a company which fails to redeem on the due date commits a breach of contract is also found in Re Dividend Fund Incorporated [1974] VR 451 at 454-456; TNT Australia Ltd v Normandy Resources NL (1989) 53 SASR 156 at 206 and Re Marra Developments Ltd (No 2) (1978) 3 ACLR 798.
57 A different analysis was made by the Full Federal Court in Federal Commissioner of Taxation v Coppleson (1981) 39 ALR 30. In what are, strictly speaking, obiter dicta, Bowen CJ, Franki J and Fisher J observed that both company and subscriber contracted on the basis of the law and, in particular, the then equivalent of s 245K. Their Honours continued:
"The parties cannot be presumed to have assumed obligations which it is unlawful for one of the parties to fulfil. It is not a case where supervening legislation operates to make the fulfilment of its obligations by one party unlawful. Rather, the parties are contracting on the basis of a given law. In these circumstances, failing the availability of one or both of the funds specified in s 61(3), the company is not in default under its contract with the holders of redeemable preference shares if it fails to redeem after receipt of the requisite notice."
58 What these cases really show, in my view, is that the question is ultimately one of construction. It cannot be doubted that, upon and by virtue of subscription for and allotment of redeemable preference shares, a contract comes into existence between the company and the shareholder. The contract may or may not impose what the Singapore court found to be an absolute obligation to redeem (or, for that matter, to pay specified dividends at specified times). If the obligation is absolute, a breach of contract occurs when the company fails to perform; and this is so even if the failure is because of unavailability of a fund from which payment may lawfully be made. There are then questions about remedies, a matter to which I shall return.
59 In the present case, the contract between York and each holder of CPRPS shares includes not only the provisions of the constitution given contractual force by s 140 of the Corporations Act but also the terms of issue set out in the prospectus. When regard is had to the content of each, the contract is seen to be of the kind described in Federal Commissioner of Taxation v Coppleson above, both as to default in the payment of dividends and as to default in redemption. The contract requires only such performance as is consistent with the statutory constraints. There are no absolute obligations.
60 I say this because of what I consider to be the clear message to be gathered from the terms of issue. The cumulative nature of the dividend shows that the contract accommodates the possibility that, because of absence or insufficiency of available profits, the whole or some part of a particular dividend instalment on CPRPS shares may not be forthcoming on the specified date. If that is the case, the unpaid amount is carried forward and added to the next dividend sum. And that process is repeated as often as may be needed until the due date for redemption arrives. At that point, any continuing dividend deficiency is required by article 29.5.14 to be paid on redemption along with the sum paid up on the CPRPS shares concerned. The possibility that unavailability of profits may intervene to preclude dividend payments is recognised in items [2], [5], [6] and [7] of the prospectus. The contract itself mitigates the payment obligation if that unavailability eventuates.
61 When it comes to redemption and moneys payable on redemption, the terms of issue, in the form of the provisions of the prospectus, show that the company's obligation to redeem (and, therefore, the obligation to make the payment that effects the redemption) will not be due for performance unless profits or the proceeds of a new issue are available so as to ensure compliance with s 245K. I refer again to what is said at paragraph [34] to [37] above.
62 My conclusion is that, in this case as in Federal Commissioner of Taxation v Coppleson, the company and the subscribers for its shares "contracted on the basis of the law", including, in particular, the parts of the law that forbid payment of dividends and redemption of redeemable preference shares unless certain conditions are met. Upon its true construction, the contract does not impose an obligation to make the payment which in turn effects the redemption due on a specified date if the payment and redemption will entail contravention of those parts of the law.
Implications of the preferred construction
63 Several conclusions may now be stated in respect of the CPRPS shares:
1. If any dividend conforming to the specifications in prospectus item [1] has been declared but remains unpaid in respect of a share, York is indebted to the shareholder for the amount of the dividend.
2. If and to the extent that a dividend conforming to the specifications in prospectus item [1] is neither declared nor paid in respect of a share by the date applicable to that dividend under that provision, no debt arises, no breach of contract occurs and the deficiency is simply carried forward to the next such date.
3. If and to the extent that a dividend conforming to the specifications in prospectus item [1], augmented by any deficiency so carried forward, is neither declared nor paid in respect of a share by the date applicable to that dividend under that provision, no debt arises, no breach of contract occurs and the deficiency is carried forward to the next such date.
4. If and to the extent that any deficiency carried forward in either of these ways in respect of a share remains unsatisfied at the time fixed for redemption of the share, the deficiency is due for payment on redemption, together with the amount paid up on the share.
5. If, at the time fixed for redemption of a share, the company cannot redeem because of unavailability of profits or proceeds of the kind made necessary by s 245K, the redemption that would be required if the necessary profits or proceeds were available is not required, no debt for the amount payable on redemption arises and no breach of contract occurs.
64 On the evidence, the circumstance in 1 above has not occurred but cases within all of 2, 3, 4 and 5 above have arisen (see paragraph [5] above). Since, on the above analysis, there is neither a debt nor a breach of contract in any of those cases, there has not accrued to any holder of a CPRPS share, by reason of the circumstances mentioned, any claim cognisable under s 553 in a winding up. It follows that no such holder is, by virtue of the holding of the holder's CPRPS shares, a creditor of York for the purposes of Part 5.3A.
65 This is sufficient to dispose of the present proceedings. It is not necessary to consider the means of redress or vindication that might be available to a holder of CPRPS shares in a further case not mentioned above (and which, on the evidence, has not arisen in relation to York). I refer to the case where the holder's shares should have been redeemed according to the terms of issue and could have been redeemed consistently with the s 254K restrictions but were not redeemed. There would then be a breach of contract and questions of remedy would arise. There are suggestions in the cases to which I have referred that an award of damages might be made against the defaulting company. There are also suggestions, however, that any damages would have to be satisfied from a fund that could lawfully have been applied in making the payment that, in breach of contract, was not made. That tends to bespeak a remedy by way of specific enforcement rather than damages as such. Winding up on the just and equitable ground is another possibility recognised in the case law.
66 Winding up on the just and equitable ground might also be indicated in case 5 above. If the company has no ability to redeem and there is no likelihood that the position will be resolved quickly, it might be considered just and equitable, even in the absence of breach of contract, that rights to participate in a winding up be crystallised and made exercisable. In the case of a holder of CPRPS shares, the relevant right would be the priority right of participation conferred by article 24.5.13.
67 I would add, for the sake of completeness, that s 588G(1A), a provision mentioned in submissions, is irrelevant to the present inquiry. It deems particular actions to be the incurring of a debt by a company. One such action is the redemption of redeemable preference shares that are redeemable at the company's option. The deeming is solely for the purposes of s 588G.
Disposition
68 The court makes the following declarations: